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EON Profit Declines on Nuclear Plant Closures, Weak Demand

EON Profit Declines 50%
An employee exits E.ON's headquarters in Dusseldorf, Germany. Photographer: Hannelore Foerster/Bloomberg

EON AG, Germany’s largest utility, said 2011 profit slumped 50 percent because of nuclear reactor closures and lower earnings from its power generation and wholesale gas business.

Underlying net income dropped to almost 2.5 billion euros ($3.3 billion), beating the 2.33 billion-euro median estimate of 26 analysts surveyed by Bloomberg. The profit measure, which EON uses to calculate its dividend,is forecast to be as much as 2.7 billion euros in 2012 and as much as 3.7 billion euros in 2013. EON rose the most in more than three years in Frankfurt.

“The market was concerned on 2012 and 2013 estimate guidance, which seems to be removed now,” Deutsche Bank AG analyst Alexander Karnick said in a note to investors today. “This suggests a bottoming out of earnings per share downgrades, possibly small EPS upgrades.”

Germany’s largest utilities are overhauling operations after the Fukushima disaster in Japan last March drove Chancellor Angela Merkel to order the permanent closing of all nuclear plants by 2022. The shutdown of nuclear stations trimmed earnings by 2.5 billion euros in 2011 and drove EON to announce a 15 billion-euro divestment program, job cuts and plans to expand into new markets including Brazil.

EON has “bottomed out,” after one of the company’s most difficult years, Chief Executive Officer Johannes Teyssen said in Dusseldorf today. The utility reported a net loss for the first time in its history of 1.86 billion euros.

Oil-Gas Link

Earnings before interest, tax, depreciation and amortization from power generation fell 44 percent in 2011 to 2.1 billion euros, while Ebitda from EON’s midstream natural gas unit dropped to a loss of 79 million euros. The company will pay a dividend of one euro a share, growing to 1.10 euros in 2012 and 2013.

EON surged 7 percent, the steepest gain since December 2008, and closed at 18.275 euros in Frankfurt. The stock has fallen 16 percent over the past year, valuing the company at 36.6 billion euros.

“The economic situation is temporarily dampening the demand for power, resulting in markedly narrower margins and lower utilization factors for our conventional power stations,” Teyssen said in a statement. Lower profits from power generation will continue to weigh on earnings through 2012, EON said.

The midstream gas division has struggled with the decoupling of oil and gas prices, EON said. The utility buys gas in long-term contracts linked to oil prices from suppliers including Statoil ASA and OAO Gazprom. Rising crude prices boosted the cost of oil-linked gas costs in 2011.

Statoil Deal

EON reached an agreement with Norway’s Statoil ASA to adjust gas contract prices to reflect current market conditions, Teyssen said today. Statoil supplies 25 percent of EON’s gas, he said.

EON is pursuing cost-cutting measures including trimming its workforce by as many as 11,000 people and selling assets. As of the end of March, EON closed deals worth 9.4 billion euros, selling stakes in OAO Gazprom and Italy’s gas distribution network.

Further disposal candidates include Germany’s gas transmission network, the EON Energy-from-Waste business and E.ON Westfalen Weser, it said in a presentation.

First New Region

Brazil will be the first new region targeted by EON. The company agreed to buy 10 percent of Brazilian billionaire Eike Batista’s MPX Energia SA and set up a power-generation joint venture in January. The two companies plan to jointly generate 20,000 megawatts in Brazil and Chile and will each own 50 percent of the business.

EON plans to invest 7 billion euros to expand its clean-energy generation capacity in the next five years as Germany shutters the utility’s nuclear reactors. EON seeks to build wind farms off the U.K., Scandinavian and German coastlines, including the 1-billion euro Amrumbank West project in the North Sea that Siemens AG, Europe’s largest engineering company, will supply with 80 of its wind turbines.

“We intend to commission a new offshore wind farm every 18 months,” Teyssen said.

EON at the end of last year owned about 9 gigawatts of renewable generation capacity, about 4.8 gigawatts of which are hydro stations. EON’s renewable energy unit saw Ebitda rise 21 percent to 1.5 billion euros as more wind turbines were installed.

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